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US GAAP Long – Duration Targeted Improvements
South Eastern Actuarial ConferenceNovember 15, 2018
www.pwc.com
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PwC | SEAC 2018
FASB LDTI Overview of Changes
2
Traditional “FAS 60” and
limited payment long
duration insurance
contracts
Guarantees in addition to
account balance in:
• variable annuities
• general account annuities
Long duration
contracts
Long duration
contracts
Effective 1/1/21 for
public business entities
(1/1/22 for others)
Early adoption permitted
01 02
03 04
Consolidated Statements of Operations
2021
Adoption
year
2020
Restated
2019
Restated
PwC | SEAC 2018
Overview
3
PwC | SEAC 2018
The LDTI Implementation challenge
4
PwC’s LDTI Survey Report of 2018 Shows…
• All insurers believe that the timeline to adoption will be challenging to some degree, of which 59% of companies believe it will be extremely challenging and a further 27% believe it will be at least moderately challenging.
• Over 70% of companies believe that the implementation across actuarial systems and data & processes will be challenging or extremely challenging.
• Over 65% of companies rated the changes to Market Risk Benefits, disaggregated roll-forwards, recalculating Net Premium Reserves on a cohort basis and transition as either extremely challenging or challenging.
PwC | SEAC 2018
Technology development approach
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Insurers have the choice of one of three main options to address LDTI requirements. Some firms will use it as a chance to strategically modernise their systems architecture. Others will take a compliance focused approach..
Objectives
654321
Get organized
and educatedUnderstand the impact
and plan the projectTransition to the new standard
Initial project set-
up, and awareness
training*
Assess
impact*
Project
planning*
Gather and
validate data
Implement
systems and
processes
Dry run and
comparatives
Jan 01, 2021
Adoption
Phases
Implementation approach
A
B
C
Strategic Path
Some firms are taking this opportunity to transform
their finance function-re-defining finance, actuarial and
risk functions, establishing the operating model, tools
and capabilities to support the business use of the new
metrics that are emerging.
Operational Efficiency Path
Some firms are building the foundation necessary to
support future transformation efforts to finance in parts,
with the focus on addressing compliance requirements
today.
Compliance Path
Some firms may seek to address the new
requirements in a low-cost compliance manner,
either through work-around solutions or by increasing
resources.
• What is the potential business
impacts of the changes?
• What is your implementation
strategy?
• What is the expected budget for
the implementation?
• Do you have sufficient internal and
external resources with the
appropriate skills required?
• Are there synergies and cost
benefits of integrating existing
technology and transformation
projects?
• How do you maximize the return
on investment to meet compliance
to deliver greater capabilities and
insights?
Key questions?
Strategic
Redefinition
Operational
Efficiency
Compliance
A
B
C
Implementation time and Costs
Ben
efi
ts
PwC | SEAC 2018
Minimum compliance vs maximum benefits technology design
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Insurers may opt for a minimum compliance or maximum benefits approach or somewhere in between this wide spectrum when approaching FASB LDTI. The following highlights key components of a chosen approach.
Minimum Compliance
• Reprogram actuarial applications to
accommodate changes in DAC and liability for future
policy benefits
• Extend existing experience study and assumption
development process for traditional fixed long-
duration and limited-payment contracts
• Incorporate additional products in scope for Market
Risk Benefits into existing fair value
valuation process
• Use spreadsheets and other manual process to
address additional disclosure requirements
Maximum Benefits
• Leverage existing data extracts while increasing data
granularity through use of data lakes and supplement
existing data with external sources
• Drive business insight & value through the use of
data visualization and advanced analytics
• Achieve greater operational efficiency, control and
consistency through RPA & machine learning
• Improve FP&A & reporting capability including
integration with data warehouse & data lakes
• Improve the controls and reconciliation capability with
new systems including balance sheet attestation
tools and data quality reporting layers
• Invest in cloud infrastructure that provides a flexible,
scalable and cost efficient environment
PwC | SEAC 2018
Liability for future benefits
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PwC | SEAC 2018
Measurement assumptions
• Assumptions must be reviewed/updated at least annually on retrospective basis (but updating other expenses is policy choice)
• No more PAD
• Premium deficiency test replaced with net premium ratio capped at 100%
• Annual cohort limitation: contracts from different original issue years cannot be grouped
Discount rate assumptions
• Upper-medium grade (low credit risk) fixed-income instrument yield (single “A”)
• Discount rate updated at each reporting date through OCI
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Whole life
Disability
Long term care
Term life
Payout annuities
*Participating contracts are excluded
FASB Long-duration targeted improvements –Liability for future policy benefits
Transition
• "Modified retrospective” transition approach
- Pivoting off of the balance at transition
- Discount rate NOT reset for purposes of calculating future net premiums and interest accretion at transition
- Same annual cohort limitation applies
• Option to elect a “full retrospective” transition approach if necessary criteria are met
PV future benefits - existing 1/1/19 liabilityPV future gross premiums
= revised net premium ratio for 2019
PwC | SEAC 2018
Liability for future benefitsData, systems and process considerations
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Data Gathering, Storage & Preparation
• Additional data needs for the new standard must be collected early for
the purpose of restatement in prior periods
• Policies will need to be tagged in system into cohorts based on issue
year, reporting segments, product features and other characteristics.
• Actual experience, e.g. premiums, claims, etc., needs to be available at
a granular level (i.e. issue year & incurred year) for the purpose of
retrospective unlocking.
• ETLs from admin systems may require redesign to handle new data
requirements and feeds to downstream systems
• New standard may require longer retention period given retrospective
unlocking
Experience Studies & Assumption Setting
• A more robust annual experience study, assumption setting, review and
(if needed) update process will need to be developed to support
unlocking of assumptions in line with accounting policies.
• External data sources may be needed to support assumption setting for
blocks with low credibility of internal data
• At-inception discount rates & current valuation model needs to be stored
in the data warehouse in anticipation for the new reporting cycle.
• Expense extracts will need to separate non-level termination and. other
expenses such as maintenance expense.
• Potential need to establishment of an Assumption Repository to keep
track of current & historical assumptions and improve assumption
management and automate experience studies
Calculations
• Existing actuarial platforms will need to be upgraded to LDTI versions or
converted to other LDTI compliant platforms.
• Consideration should be given to accelerating the migration of legacy
systems if possible
• Updates to the input files (i.e. inforce files, assumption tables, actuals
etc.) will be needed for LDTI compliant models to support required
calculations
• LDTI requires a significant increase in data volumes and processing
required during reporting periods. Consideration should be given to the
extent that workflow automation tools
• Consideration should be given to compute requirements (e.g. server or
cloud capacity needs)
Transition
• The modified retrospective transition approach will need the current
reserve balance available at the cohort level
• Companies may need to refine its loss recognition assumptions for
year-end 2018 to better position themselves at transition which will have
associated process and data impacts
PwC | SEAC 2018
Market risk benefits
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PwC | SEAC 2018 11
Transition
• Retrospective application: If assumptions in prior period unobservable or otherwise unavailable and cannot be independently substantiated (e.g., to calculate “attributed fee” at contract inception), may use hindsight in determining assumptions
Variable annuities
GMABGMWB
GMIBGMDB
Fixed indexed annuities
Measurement• Fair value with changes through income
- Except that changes to instrument-specificcredit risk recognized in OCI
Scope IN• All types of GMXBs:
- In variable annuity separate accounts - In general account annuities
• Annuitization interest rate guarantees if otherthan nominal
OUT• Minimum interest rate guarantees on account
balance• Variable life insurance benefits• No lapse guarantees on universal life
equity crediting rate on acct balance = embedded
GMWB for life
FASB Long-duration targeted improvements -Market risk benefits (MRBs)
PwC | SEAC 2018
Market risk benefitsData, systems and process considerations
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Data Gathering, Storage & Preparation
• Given the need to estimate the attributed fee ratio at contract inception
and the requirement of performing retrospective application at transition,
companies will likely need to spend significant efforts on data gathering.
• Unlike SOP 03-1 reserve calculations that are typically performed at a
cohort level, no such cohort requirement exists for the fair value
calculation, potentially requiring ETL to be modified.
Experience Studies & Assumption Setting
• Risk neutral scenarios are required for fair value calculations. This is
different from the real world scenarios under SOP 03-1 and may require
new data fields and calibration processes to be established
• Processes and data may need to be developed for assumptions for
items such as allowance for non-performance risk, risk margin, etc.
Calculations
• For companies that do not report fair value currently, new actuarial and
finance process needs to be set up. Separation of impact of non-
performance risk will be required.
• Compared to SOP 03-1 reserves which is a retrospective calculation,
fair value is prospective calculation with the attributed fee ratio locked
in at issue.
• Additional model runs need to be performed, automated and stored to
do a full attribution analysis for the fair value calculation.
Transition
• Retrospective application is required at transition, putting burdens on
companies to collect information/data back to the contract
inception date.
• Companies are allowed to use hindsight to measure fair value
components to the extent assumptions in prior periods are
unobservable or otherwise unavailable. Areas where hindsight can be
applied (and approach thereon) likely will require discussions
and judgement.
PwC | SEAC 2018
DAC
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PwC | SEAC 2018
FASB Long-duration targeted improvements –DAC amortization
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Scope
• All long-duration insurance contracts (except investment contracts that use effective yield method)
DAC amortization
• Principles-based amortization: constant level basis over expected life of contract, independent of profit emergence
• No impairment test
• No interest accretion
• Accrue and amortize acquisition costs only as incurred
What about other balances similar to DAC ?
• Deferred sales inducement costs and U/L unearned revenue liability
• Other balances often amortized like DAC (business combination intangibles and cost of reinsurance)?
Transition
• Apply new amortization method to existing DAC balancesat transition date (after removing shadow DAC adjustmentfrom AOCI)
• Except where full retrospective method adopted for liability for future policy benefits.
Year Insurance in force
Amortization
2021 $1,000 16
2022 1,000 16
2023 1,000 16
2024 1,000 16
2025 1,000 16
Total 5,000
DAC 80 80
Amortization rate
1.6%
PwC | SEAC 2018
DACData, systems and process considerations
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Data Gathering, Storage & Preparation
• New amortization basis and logic will need to be developed for both
FAS 60 and FAS 97 products. This will result in new data feeds from
source systems to DAC calculation engines.
• Data warehouse should store expenses to be capitalized, actual
persistency information and updated assumptions which are inputs to
the actuarial valuation model
Experience Studies & Assumption Setting
• DAC amortization requires updated assumptions to be reflected, which
will require revised data feeds from sources to the DAC
calculation engine
Calculations
• Typically DAC is currently calculated for many firms within EUCs.
Consideration should be given to migrate this calculation into more
robust platforms (e.g. actuarial valuation systems, data warehouse,
and/or finance systems)
• Calculation for other balances may need to change depending on policy
policies (e.g. adopt the same methodology/amortization basis for CoR,
VOBA, etc)
Transition
• Existing DAC (and similar balances) retained, except that AOCI relating
to "shadow DAC" (and other similar balances) would be reversed and
recorded as an adjustment to the DAC (and other similar balances) at
the transition date.
PwC | SEAC 2018
Presentation and disclosure
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PwC | SEAC 2018
FASB Long-duration targeted improvements -Presentation and disclosurePresentation requirements
• Impact of updating assumptions for liability for future policy benefits separately presented in P/L
• MRB separately presented in B/S with changes in fair value separately presented in P/L and OCI
Disclosure requirements
• For annual and interim reporting periods:
- Disaggregated rollforwards and reconciliations to B/S amounts
• For annual reporting periods and as required under ASC 270 for interim reporting:
- Information about inputs, judgments, assumptions and methods, changes during the period, and effect of those changes
- Qualitative and quantitative discussion about adverse development
- Premium deficiency methodology utilized and the liability recorded for participating insurance contracts (including closed block) and U/L contracts
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Transition
• Disaggregated rollforwards of pre-adoption transition date balances to post-adoption transition date balances
• Qualitative and quantitative information about the effect of transition adjustments
Balance
sheet
Income
statement
Notes to
F/SNotes to
F/SNotes to
F/SNotes to
F/SNotes to
F/SNotes to
F/S
PwC | SEAC 2018
Presentation, disclosure and transition Data, systems and process considerations
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Data Gathering, Storage & Preparation
• ETLs to handle additional data feeds and granularity across actuarial,
data and finance systems to reporting and consolidation tools to support
new disclosure requirements
Experience Studies & Assumption Setting
• New working day timetables will need to be developed with supporting
underlying processes and control frameworks established
• LDTI may create additional pressure on the reporting timeline. Potential
to explore workflow management tools and additional automation tools
• Firms may wish to leverage automation tools to support generation of
disclosures write ups
• Firms may wish to consider rationalizing existing reports and leveraging
enhance BI/visualization tools to deliver greater
business insights
Calculations
• New processes and capabilities within actuarial platforms will need to be
established to perform attribution (e.g. functionality for batch runs)
• It is likely that actuarial model runs will need to be automated to provide
greater production efficiencies to meet reporting timetables
• Tweak to accounting rules engine and CoA will be needed to capture
the changes in presentation and granularity (e..g. presentation in OCI)
Transition
• Updated and/or additional roles will be required to reflect changes in the
accounting policies, data, processes and systems
• Control framework will need to be updated to reflect the
new processes
• Enhancements to components of the data management framework are
expected to reflect the associated changes to the underlying data and
systems (e.g. data dictionary, metadata management, data
governance etc)
PwC | SEAC 2018
Further information
Get the latest insights on insurance modernization and visit us online:https://www.pwc.com/us/en/insurance/insurance-modernization.html
PwC Summaries of FASB Meetings:https://www.pwc.com/us/en/cfodirect/industries/insurance/iasb-fasb-insurance-contracts-project-meeting-summaries.html
Other PwC thought leadership:https://www.pwc.com/us/en/cfodirect/issues/insurance-contracts.html
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Thank you
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